Danger Signals of Excessive Debt

Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu

According to Webster’s Dictionary, debt is defined as “the state of owing.” Most commonly, the word debt is used in reference to money that is owed to various creditors as in the case of debt incurred through loans and credit cards. How do you know when you have taken on too much debt? Take the following quiz to determine whether you are using credit wisely or getting in over your head.

father and child

Circle the following statements that apply to you and/or your family:

¨ Your monthly consumer debt payments (do not include a mortgage or rent) are 20% or more of your monthly take-home pay

¨ You buy things with credit cards that you would not buy if you had to pay cash for them

¨ You charge day-to-day expenses, like gas and shampoo, instead of paying for them with cash

¨ You are at or near the limit of your lines of credit (i.e., you are “maxed out”)

¨ You pay only the minimum amount due on your credit card bills each month

¨ You are chronically late in paying household bills and/or debt payments

¨ You have had late fees assessed on debt payments

¨ You frequently receive “past due” bill notices in the mail

¨ You keep making new credit purchases so the amount that you owe does not decrease

¨ You get new loans or credit cards to make payments on existing loans or credit cards

¨ Your family has frequent arguments about money

¨ You are dishonest with your spouse about your use of credit and/or shopping habits

¨ You often have to skip payments on some bills in order to make payments on others (i.e., “bill juggling”)

¨ You frequently borrow small amounts of money from family members or friends

¨ You have had to ask a family member or friend to cosign a loan

¨ You use savings to pay bills that used to be paid with cash or a check

¨ You hold more than ten credit cards, including gasoline and department store cards

¨ You owe money to more than seven creditors

¨ You do not know the total of what you actually owe and are afraid to add it up

¨ You have to borrow money to pay expected expenses such as insurance premiums and taxes

¨ You have been turned down for a credit card or a loan within the last six months

¨ You put off medical and dental visits because you can not afford them

¨ You frequently get behind on utility payments and have had utilities threaten to shut off service

¨ You have been threatened by creditors with legal action or repossession of your car

¨ You would be in immediate financial distress if you were unable to work or lost your job

¨ You frequently “bounce” checks or rely on the overdraft protection feature of your checking account

¨ You write post-dated checks and/or get cash advances from payday lending companies

¨ You are experiencing an ever-widening gap between your income and household expenses

¨ You think of credit more as a form of “cash” rather than a source of debt

¨ You are an impulsive or compulsive spender (a.k.a., a “shopaholic”)

¨ You have borrowed against life insurance with little chance of repayment

¨ Your credit report lists one or more negative items (e.g., late payments, car repossession, collection actions, liens, and charged-off debts)

¨ You have a negative net worth (i.e., your debts are greater than your assets)

¨ You worry about money and/or feel stress related to your personal finances

If you circled five or more of the above statements, you are clearly exhibiting multiple warning signs of excessive debt. The more items that you checked, the more serious your debt problem probably is. Take the time to honestly evaluate your cash flow patterns and use of credit and develop strategies to bring your spending into line with your income. Your situation is not hopeless, but it will take a commitment to correct the situation and get back on the road to financial security.

What can you do to regain control of your finances and reduce debt? First, try to reduce your expenses (even further than you may already have) and investigate possible ways to increase or extend your income. For example, you may qualify for assistance from government or non-profit agencies. Specific types of programs include food stamps, low-income energy assistance, and unemployment compensation. Also, contact your creditors to explain your financial difficulties. Do this, preferably, before you make a late payment and try to work out a realistic payment schedule.

You may also want to contact a non-profit credit counseling agency for assistance. A credit counselor may be able to negotiate payment concessions from your creditors and can help you repay outstanding debt through monthly payments that are distributed among those you owe money to. Another helpful resource to get out of debt is a PowerPay (see www.powerpay.org), an online debt reduction program. PowerPay can help you accelerate debt repayment, thereby reducing both repayment time and interest charges.